How you’re paying for Wall Street’s sins

Commentary: The settlement wave is drowning your 401(k)

SAN FRANCISCO (MarketWatch) — This year will be remembered as the year of settlements on Wall Street. And regulators who have fashioned these agreements will think back fondly on how they drove tough bargains, made firms admit wrongdoing and extracted enormous sums.

And while there is something to be proud of, let’s be honest: Most of these institutions see these settlements as the cost of doing business. They’ve socked away billions in legal reserves. The show goes on.

Two parties, really. First, and most obviously, there are the victims. There were the nearly 5 million home borrowers who were foreclosed on, the investors who lost enormous sums and the economy as a whole. Second, and often forgotten, are the shareholders of these banks. And before you pat yourself on the back for not owning individual shares of, say, J.P. Morgan Chase & Co.
JPM, -0.74%
or Bank of America Corp.
BAC, -1.38%
directly, go dig through your trash and find the prospectuses that your 401(k) or pension plan sent you.

You own banks and brokerages. Sorry.

Fidelity Investments, Vanguard Group Inc. and T. Rowe Price — three of the nation’s biggest retirement fund managers — own a combined 363 million shares of J.P. Morgan and 833 million shares of Bank of America. That’s 9.6% and 8% of each bank’s outstanding shares, respectively. Institutions, mostly mutual-fund companies, own 74.82% and 59.1% of those companies, respectively, according to regulatory filings.

You own banks and brokerages. Sorry.

So what’s been the impact? Bank stocks have significantly lagged the recovery. During the past five years, the overhang of bailouts and legal liability for wrongdoing have battered the big banks. B. of A. is down 10% during that half-decade. J.P. Morgan is up roughly 58%. Citigroup Inc.
C, -0.71%
has gained nearly 40%. The KBW Bank Index
BKX, -0.69%
up 22.5%, too.

What’s more discouraging is how banks have weighed down the market — even amid the rally. The Consumer Staples Index ETF
XLP, +0.20%
for instance, has rallied 85%. The technology-heavy Nasdaq Composite Index
COMP, -0.01%
is up 150%.

Investors have clearly borne the brunt of all this. Meanwhile, executives at some of the most penalized banks soldier on. They love to brag, as the settlement costs rise, about how they’re putting the past behind them and their companies are moving on.

Jamie Dimon at J.P. Morgan is one of the few executives to hold the chief executive job through the crisis. His bank set aside $23 billion to cover legal woes, and it looks as if that won’t be enough. The bank is believed to be negotiating settlements that would put it closer to $26 billion–plus in liabilities.

Lloyd Blankfein at Goldman Sachs Group Inc.
GS, -1.03%
is another survivor. But Goldman is falling short in its legal reserves, too. Last week the investment bank again said its legal liabilities may exceed what it has set aside by $4 billion.

In July, Wells Fargo & Co.
WFC, -0.48%
became the world’s biggest bank by market capitalization, surpassing Industrial & Commercial Bank of China Ltd. Unfortunately for John Stumpf, another long-running chief executive, the bank is facing the same mounting legal liability of lesser-valued banks. Wells Fargo has agreed to $9.2 billion in settlements already, a number exceeding some estimates, including the bank’s own.

And most of these banks are now open to private lawsuits from private investors who lost money on the deals in question.

You can see the issue here. Someone is spending a lot of shareholders’ money for mistakes made on their watch. How these CEOs survive and even flourish (in Dimon’s case in particular) is astounding.

Imagine if Jeffrey Immelt at General Electric Co.
GE, -0.08%
or Rex Tillerson at Exxon Mobil
XOM, -4.58%
had presided over a series of scandals that cost their companies $20 billion or more in settlements and legal costs. You can bet they wouldn’t be crowing about their companies moving on.

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